Risk Rap

Rapping About a World at Risk

Another Monday Morning Fire Drill

The historic actions and non-actions by the Fed and Treasury Department continue the accelerating velocity of change in the global banking system.

The decision not to rescue Lehman Brothers was a sign of confidence in the capital markets. The acquisition of Merrill Lynch by Bank of America was a dramatic shattering of the last vestiges of Glass-Steagall Act prohibition of FDIC insured commercial banks owning investment banking institutions. This also represents a radical reconfiguration of the US and global capital markets industries.

Dow constituent AIG and its $1 T balance sheet has been a capital market problem child for the past few years. AIG has been mired in scandal for price fixing insurance premiums, accused of poor governance controls and the market has been critical of AIG for the unmanagability of its business units and the ballooning portfolio of its credit default swap and other risk transfer products correlated to the credit markets. It is seeking a $40 B bridge loan from the Fed to shore up capital while it seeks additional infusions from investors to avoid a credit downgrade by the major credit rating agencies.

The Fed also hinted about the creation of a special solvency fund of pooled assets from SWF, private equity providers, governments and other institutional investors. Perhaps this is the pool that AIG will dive into for its bridge loan?

These are incredible developments and our regulators, governmental institutions and industry executives are doing their best to manage this crisis. They are walking a fine line inching towards the precipice of where free markets and a managed economy intersect.

WOW. Is our hair on fire?

Music: Edward Grieg, In the Hall of the Mountain King

Risk: free markets, banking system, Glass-Steagall Act, Federal Reserve,

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September 15, 2008 - Posted by | banking, classical, credit crisis, regulatory, sovereign wealth funds | , , , , , , , ,

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